How Does Front-Running Risk Affect the Bid-Ask Spread for Crypto Derivatives? ▴ Learn

How Does Front-Running Risk Affect the Bid-Ask Spread for Crypto Derivatives?

Front-running risk widens the bid-ask spread for crypto derivatives. Market makers, who profit from the spread, must account for the risk that their orders will be front-run, leading to a loss.

To compensate for this risk, they will quote a lower bid price and a higher ask price, resulting in a wider spread. This increases the transaction cost for all other traders.

What Is the Concept of “Adverse Selection” for a Market Maker in Derivatives Trading?

Why Do Market Makers Prefer to Trade at the Bid or Ask Rather than the Mid-Price?

How Does the Risk of “Adverse Selection” Affect a Market Maker’s Quoted Spread?

How Does the Concept of “Model Risk” Contribute to the Wider Spreads of Exotic Options?